Time for property investors to diversify once again

While the worst performers among the JSE’s 50-odd property stocks in the first quarter were still dominated by rand hedge counters, analysts expect the trend to reverse over the next few months. They feel that jittery SA investors will seek to increase exposure to real estate counters that generate 100% of their earnings in dollars, pounds or euros.

Most property fund managers have, in recent weeks, already sold off some of their local holdings on the back of SA’s credit ratings downgrade and uncertain economic and political climate. The SA listed property index is down about 5% from its early March highs.

Keillen Ndlovu, head of listed property funds at Stanlib, says they have selectively sold off local stocks and invested the proceeds in rand hedge counters. However, Ndlovu emphasises that the call to gradually increase Stanlib’s offshore exposure is based on fundamentals and valuations and not on currency speculation or movements. He refers to the fact that a number of offshore property stocks are now trading at attractive discounts to net asset value following ongoing pressure on share prices over the past 12 months.

Sesfikile Capital echoes a similar sentiment in its latest monthly overview of the listed property sector, saying recent political instability is likely to create headwinds for the local property sector and the broader SA economy.

"With this we are likely to increase our offshore exposure. However, we are already overweight non-SA stocks and will not be forced into stocks premised on currency, but rather on core property fundamentals."

Sesfikile notes that it would be irrational to ignore local stocks. "Our local management teams and property assets are still world-class and if a further sell-down ensues, there will definitely be buying opportunities.

"Let us not forget how local counters materially outperformed their offshore peers in 2016, leaving many investors on the wrong side."

Most offshore property stocks, of which there are already about 20 to choose from on the JSE, have tumbled over the past 12 months on the back of a stronger rand and concerns around how Brexit will play out. Share prices of counters with exposure to the UK were hardest hit.

These include the likes of Tradehold, Stenprop, Redefine International, Atlantic Leaf Properties, Capital & Counties Properties and Intu Properties, which recorded negative total returns of anything between 20% and 40% in the year to April 21 (read the table).

One of the rand hedge property stocks that is on a number of fund managers’ buying lists is UK and European mall owner Hammerson. The company owns 56 shopping centres and factory outlet malls across 13 countries including Ireland, England, France and Spain.

Its flagship assets are Bullring in Birmingham and Les Terrasses du Port in Marseille, France.

Hammerson has been listed on the London Stock Exchange since 1953 and overtook Growthpoint Properties as the JSE’s largest property counter when it listed on September 1 last year with a market cap of R91.6bn.

Hammerson’s share price, like that of most other rand hedges, has since been under pressure. The counter was down more than 20% from its listings price of R115.75 by March 24 but has since recovered to around R102.

Ndlovu says at these levels, Hammerson still offers value as the stock is trading at a discount to net asset value of about 20% and offers a one-year forward dividend yield of just over 4% (in sterling).

He believes Hammerson offers better prospects, both in terms of portfolio value and earnings growth, than other UK-focused mall owners such as Intu. Earnings are projected to grow by a solid 6%-7%/year over the next two to three years.

"We believe the long-term fundamentals for Hammerson are firmly in place," says Ndlovu.

Hammerson already had a strong following among South Africans before it listed on the JSE, with 12% of its shares owned by SA investors. Hammerson CEO David Atkins said at the time of the listing that he expected the SA shareholding to rise to between 15% and 17% within six months. He said there had been strong demand from SA investors for Hammerson shares before the listing but that many had already reached their offshore allowance threshold.

"A secondary inward listing on the JSE therefore made sense as it removed the exchange control barrier."